Endogenous Efficiency Gains from Mergers with and without Product Differentiation

60 Pages Posted: 12 Feb 2016

See all articles by Gamal Atallah

Gamal Atallah

University of Ottawa - Department of Economics

Date Written: September 11, 2015

Abstract

This paper analyzes endogenous efficiency gains from mergers. It considers oligopolistic homogeneous good markets and duopolistic and triopolistic markets under product differentiation (quantity and price competition). In a two-stage game, firms invest in cost-reducing innovation (with and without mergers) and then compete in output/prices. It is found that in homogeneous good markets, all possible mergers generate efficiency gains, and that these are most significant when spillovers are very low or very high. Efficiency gains increase with the number of insiders and generally decrease with the number of outsiders. With product differentiation, under quantity competition, and under price competition with outsiders to the merger, the merger generates efficiency gains when R&D spillovers and/or product differentiation are sufficiently high. Under price competition with a merger to monopoly, the merger induces efficiency gains except when spillovers are very low. With product differentiation, efficiency gains increase with R&D spillovers, but may increase or decrease with the level of product differentiation. Innovation incentives and the likelihood of efficiency gains are compared between quantity and price competition. The implications of the results for the relationship between competition and innovation outputs and for merger policy are discussed.

Keywords: Mergers, Efficiency gains, Cost reduction, R&D, Process R&D, R&D spillovers, Antitrust, Competition policy

JEL Classification: D43, L13, L40, O30

Suggested Citation

Atallah, Gamal, Endogenous Efficiency Gains from Mergers with and without Product Differentiation (September 11, 2015). Available at SSRN: https://ssrn.com/abstract=2731199 or http://dx.doi.org/10.2139/ssrn.2731199

Gamal Atallah (Contact Author)

University of Ottawa - Department of Economics ( email )

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